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The theory is that the market is efficient, taking all known information and using it to properly value stocks. The reality is a little different, as investors often make emotional decisions, rather than rational ones, that can result in poor valuation of stocks over shorter periods. For investors with long-term income seeking good dividend yield, looking for these short-term valuation errors can be a great way to look for high yield opportunities. Now it seems ExxonMobil Corporation (NYSE: XOM) and General Mills, Inc. (NYSE: GIS) are two hated dividend stocks to consider the purchase.
1. A giant with a plan
Exxon has not impressed investors lately. Oil production is declining and Return on Capital Employed (ROCE) has dropped from the industry, simply leading to the middle of the road. The oil recovery that has taken place since the beginning of 2016 has allowed the company to post a general improvement in its revenue and turnover, with a growth in the profits of the company. One year on the other every quarter for more than a year. But the underlying trends in production and ROCE left Exxon behind most of the integrated energy companies, which benefited more from rising oil prices.
Source of the image: Getty Images.
Let us add now that Exxon is an oil company, in a sector where clean energy should become obsolete. Indeed, there are good reasons to dislike Exxon today, which is why the return on equity, at a very generous rate of 4%, is higher than ever since 1990s and that its price in book value is lower than it is since this decade. Both suggest that Exxon is on sale today.
But this is only true if the oil giant can reverse the situation and restore production. It should not be surprising that Exxon has planned to do so, with the goal of doubling profits by 2025 through new oil developments and investments in refining and chemicals. To get there, oil must remain at about $ 60 per barrel. Along the way, the company also hopes to improve return on investment (ROCE), from the single figure to the average figure.
With respect to demand for oil and natural gas, Exxon sees no sign of declining demand for at least 20 years. Emerging markets, which still use significantly less oil than developed countries, are driving it. As these countries move up the socio-economic ladder, demand for oil and natural gas will continue to increase. And as oil and natural gas wells deplete assets, more drilling will be required to meet this demand. In other words, it is not necessary to radically change the business model. If this long-term vision makes sense and you can wait for Exxon's current investments to leave behind this weakness, you can achieve a 4% return supported by 36 years of annual dividend increases.
2. A big bet on growth
General Mills deals with packaged food, a sector of the market that has been largely defeated for some time. The main reason is that consumers are turning to foods perceived to be healthier and cooler. To make matters worse, General Mills made some notable missteps, like completely forgetting the madness of Greek yogurt. It was so serious that the company's Yoplait brand moved from the second-largest yogurt brand in the US market to the third, while the Greek yogurt Chobani ate its lunch (yogurt).
Dividend Yield (TTM) GIS Data by YCharts
This partly explains why the stock is currently reporting 4.3%, its highest level in decades. The other reason is that General Mills has just made a very important and expensive acquisition. Buying businesses is not new to society; he has been doing this for years to help his business evolve. For example, she bought Annie's and Larabar to reinforce her presence in the "healthy" areas favored by consumers. Both agreements have worked rather well so far, but they were rather modest. The latest acquisition, however, cost $ 8 billion and prompted the company to embark on a new pet food business. Investors worry that the debt-financed deal paid too much, even though Blue Buffalo is a leading and fast-growing brand in the healthy pet food sector.
It's possible, but investors should not bog down too much in the details. Debt will weigh on society in the short term; Interest expense increased 84% from the first quarter of the year. But the interest earned during the quarter was nearly 4.5 times larger, leaving the company with a lot of leeway to bear the additional cost of the transaction. Blue Buffalo is also continuing to grow its business. General Mills has helped extend the reach of the brand through its extensive distribution network. The most likely scenario is that General Mills, which sells staples to a large number of end customers, maintains the current dividend until it improves its balance sheet structure. In the meantime, recent results suggest that the rest of its business is starting to be in order, with a growing share in eight of its nine major business sectors.
If you can face a little uncertainty and think long-term while General Mills absorbs the acquisition of Blue Buffalo, you can get a huge return from this iconic food company that has adapted to the changing market trends many times over. course of its history. years.
Watch today
If you accept the idea that the stock market tends to go to extremes in the short term, but rewards companies whose valuations are fair in the long run, you will want to take a look at Exxon and at General Mills today. Yes, every society faces problems, but out-of-order actions seem too cheap today when we look at their historical performance trends. In the end, this is a perfect fit for long-term investors who want to add high-yielding equities to their portfolios.
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